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New Jersey's 2012 Economic Outlook: Better But Not Good

By Patrick J. O'Keefe, Director of Economic Research, J.H. Cohn

In 2008, the U.S. economy endured a near-death experience as the implosion of housing and financial markets intensified a contraction in output and jobs.

The economy survived the "great recession" but - with its vigor diminished - has yet to recover fully.

By some measures, the damage has been undone. Nationally, real Gross Domestic Product ("GDP") - that is, the total output of goods and services adjusted for inflation - recently regained its pre-recession peak. And real after-tax incomes are higher than before the recession began (due largely to income transfers and tax cuts).

But other indicators continue to languish. There are, for example, 6.2 million fewer jobs than when the downturn began. Real earnings (i.e., wage and salary disbursements) are almost 5% below the December 2007 level. And more than two years after the recession "officially" ended, business and household confidence, while better than the depths of downturn, remains feeble.

The economy's performance was mixed in 2011, but the pace of growth accelerated (from modest to moderate) in the third quarter and appeared to be gaining momentum as 2012 approached.

With interest rates near record lows and the economy awash in liquidity, monetary policy is positioned to accommodate growth in 2012 - yet can do little more to stimulate it. Financial turmoil in the Eurozone and fiscal discord in the U.S. have the potential to disrupt the rebound, but they are most likely to unfold in ways that only crimp it.

That being the case, we can expect the U.S. economy to continue to grow in 2012, but at a more subdued rate than in the second half of 2011. Against that backdrop, what is the outlook for New Jersey?

New Jersey is a relatively wealthy, high-cost state with mature development patterns and a regionally integrated economy. The State's GDP was approximately $500 billion in 2010 (the most recent data), about 3.4% of the national economy. Its real per capita GDP ranks seventh among all states, about one-fifth higher than the national average.

Over the past two decades, New Jersey's economic performance has tended to track, but underperform the national economy. In the ten years (1998-2007) prior to the recession, real (i.e., inflation-adjusted) output grew in tandem with the national economy, but the State's average annual growth (2.3%) lagged the nation's (3.0%).

And that gap appears to have widened since the downturn began. In 2009, New Jersey contracted more sharply (-3.9%) than the nation (-2.8%) and is recovering a tad slower.

The State's goods producing industries (i.e., manufacturing and construction), which comprised about 12% of the economy at its peak in 2008, accounted for more than 40% of the decline in GDP. Private service providers (representing more than three-quarters of the State's economy at its peak) accounted for a bit more than half of the contraction. Public sector activity was flat during the downturn.

By the end of 2011, real GDP in New Jersey was near its pre-recession peak. The recovery has been uneven, however. Growth has been disproportionately concentrated among private service providers (particularly, business and professional services, healthcare, and retail trade), while goods producers and the public sector have drifted downward. The coming year should see some broadening of the private sector gains, but the public sector will remain fiscally constrained.

The U.S. economic recovery "officially" began mid-2009. But the jobs recovery did not begin until March 2010, when the private sector added jobs for the first time since the recession began at the end of 2007.

Private employment has risen nationally for 21 consecutive months, growing 2.8% from the recession's nadir. New Jersey added private jobs in 16 of those months, recording a net gain of 1.9%. Over that span, however, growth in total employment was diminished by public sector cutbacks that partially offset private sector gains. (In New Jersey, government job cuts were equivalent to 38.6% of the net increase in private jobs; nationally, they offset 16.5%.)

For 2011, the State will record the largest increase in private jobs in ten years. But that is testimony to the weakness of the preceding decade, not the strength of the recovery. New Jersey has 5.2% fewer private jobs than at the outset of the recession and 120,000 fewer than at the beginning of the Millennium - 12 years ago.

Thus far, the State's jobs recovery has been confined exclusively to the private services sector. And nine-tenths of that gain occurred in just three industries (business services, retail, and healthcare) which collectively provide less than half of all private jobs.

As noted earlier, with the economy gaining momentum toward the end of 2011, it is likely that New Jersey's expansion will gradually broaden and accelerate in 2012.

In the 12 months through October, consumer spending in New Jersey was 5.7% higher than in the comparable period a year ago. With employment growing, incomes rising, and inflation in check, consumers should provide further momentum to New Jersey's economy in 2012.

Real estate and construction should also provide impetus, but only after a rocky start.

Housing prices will be pressured early in the year as resolution of the legal logjam delaying foreclosures causes a spike in distress sales. The surge in inventory will be temporary, however, and the combination of distress-discounting and low interest rates should see it absorbed relatively quickly.

Construction is poised to pick up a bit in 2012. After three years of historically low homebuilding, for-sale inventories are depleted; concurrently, the demand for rentals is rising. And as employment continues to grow, nonresidential activity should begin to rebound in the second half of the year. Improvement in both will be gradual, however.

Barring an external shock, the outlook for New Jersey's economy is another year of mediocre growth. Which prompts many to wonder why the economy continues to perform at a historically sub-par pace.

The near-death experience of 2008 was decades in the making. To be certain: there has been progress in addressing its causes. But as the recent financial and fiscal turmoil reminds us, its causes have been contained, not resolved. As a consequence, the economy faces several years of sluggish growth.

That may be unappealing, but it is superior to the alternatives.

Patrick J. O'Keefe is director of economic research at J.H. Cohn. He can be reached at or 1-877-704-3500.

View the "Insight on the Economy" resource page and sign up to receive Economic Notes.

Published date: 1/4/2012

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